The Value of Digital Distribution

Jenny and Aaron from Epitonic.com debate digital distribution and royalty payments for artists in the digital age

Jenny Toomey

Thursday, March 9, 2000

Of the twenty or so digital download sites that we have been exploring,
Epitonic stands out as one of the friendliest and most idealistic of the
bunch. Founded on a deep love of music, Epitonic takes an editorial stand
seeking out the interesting and challenging music for their wired audience
and partnering with labels that represent cutting edge and high quality
artists. Partnerships between Epitonic.com and some of the most respected
and fiercely independent labels such as K
Records and Touch
and Go say a lot about president and founder Aaron Newton’s ability
to connect with established independent music channels. When asked about
his reasons for working with these indies, he answered, “The first time
I ever kissed a girl, The Jesus Lizard was playing.” If things continue
to go the way they have been, Touch and Go will be instrumental in helping
Aaron to get lucky all over again. I spoke with Aaron last month about
the Internet and music.

J = Jenny Toomey
A = Aaron Newton

J: Who are you?

My name is Aaron Newton. I’m the president and founder of
Epitonic.com, which was founded by myself, and two friends; Scott
Bilby and Justin Sinkovich.

J: What is Epitonic?

A: Epitonic is a music destination website that features downloadable
music content from mostly underground, independent, cutting-edge musicians
that have been editorially selected. We don’t take music from the average
unsigned band that just happened to record their favorite ditties. We
work with well-respected independent record labels to promote their artists.

J: How does Epitonic promote these artists?

A: We have a robust website that has bios and descriptions of each artist
including cover art and each artist associated with the record labels
responsible for their releases. The music is free to download so you can
come here to check out some tracks. You can’t download an entire album
but you can usually download a couple of tracks for each artist and, if
an artist has several albums out you can usually download a track or two
from each release. So the thing that we really offer to the consumer,
which is a little different than everywhere else you go, is the ability
to learn about and listen to a breadth of independent music that is above
the quality of the MP3.com world but also isn’t Britney Spears.

J: I see, and that’s why you are different?

A: Well that’s probably the biggest difference. If you want the real
business reasons why we are different the competitive landscape of music
right now online can be broken down to three categories. The first is
the soapbox for the unsigned artist, which is the MP3.com business model.
The second is the music search engine, like Listen.com,
which by the way I think is a very good site, but is always one step removed
from the music. I mean, you go to Listen, but then you leave Listen to
actually hear the music which also means you are limited in your ability
to do certain things like make a radio station or something like that.
The final category is the content aggregator, or, the term that seems
to be going around the industry these days is, the “meta label”. These
meta label sites, of which Epitonic is one, go out and work with existing,
established acts, although we do have some unsigned artists on our site.
Those established acts, or their record labels, whoever own the song’s
rights, give us the permission to post their content to the web so consumers
can find it.

Now what makes us different from the other content aggregators, who are
companies like Emusic
and Cductive, is the
editorial voice that we adhere to. We don’t just sign up anything that
we can get our hands on. We only sign artists and labels that we personally
feel represent quality, artistically-sound music. The message to the consumer
is, not that we know music better than they do, but that we’re going to
spend the time looking so they don’t have to.

J: There is a lot of competition out there. On one hand you are running
up against the uber-corporation with unlimited resources to mimic whatever
proves profitable. On the other hand you are competing with self-reliant
artists who put up their own sites and files so that search-engine sites
like Listen.com can direct any interested traffic directly to them without
a middleman. How do you intend to compete with these two extremes?

A: Well, the big corporation model, we don’t necessarily intend to compete
with them. We intend to be an outlet for them. So when Universal plans
to bring its content online and they’re like, “Well, we own Geffen and
Geffen has all these Sonic Youth albums but where’s the best place for
us to promote this?” they will promote them with us. In the same way that
the record labels today don’t only put their records at Tower, they put
them at Tower and Virgin and Warehouse and anywhere else they can.

We think they are going to want to market their music online by putting
it anywhere they might reach an audience. So the real question then becomes,
“How do we plan on making sure that we can reach the audienceÆ’that the
audience comes to us on a regular basis?” The answer to that question
is, “How do we compete with the other companies like Listen.com?” and
the answer there is we think of ourselvesÆ’the core or our mission is all
about the discovery of new quality music. It’s kind of the indie rock
attitude of, “Hey, there’s better music out there than what corporate
rock brings you.”

So our real value to the consumer is that we are going to bring them a
selection of music that’s been sifted through by people who really do
eat, sleep and breathe music. When you go to Listen.com it’s a different
thing. Listen is trying to be everything to everyone. I mean, their market
is pretty large but they probably don’t have a super intimate relationship
with those customers.

We sift through that music and only bring to market the stuff that we
think is aesthetically and economically viable in the same way that a
record label does. Our market is smaller, but we have a more intimate
relationship with our customers. So when it comes to people like Listen.com,
we like them. We were one of their launch partners and we provide them
access to our database so they constantly have all of our artists. So
in a way, Listen needs us and we need Listen. But when it comes to “owning
the consumer experience” we think Listen will have a good relationship
with lots of different people and we’ll have a great relationship with
a section of that group of people that encompass our demographic of music listenership.

The other big message is that we want to be the source and inspiring factor
for the discovery of new music. We think that when you do that for somebody,
when you successfully connect a fan with their new favorite band, they
will trust you then next time you suggest something. We think we are going
to be in a better position to do that for that target group. So if they
come to our site and they find some amazing band, they are going to be
more inclined to listen to us when we suggest another one to them.

J: If a band wanted to be on your site how would they go about it?

A: Well, because we are an editorial site there is a process of editorial
review. We currently have a team of label relations people and this group
of people is made up of DJs and people in indie rock bands and so on.
Each member of the team is generally responsible for a different type
of music. So this person over here is responsible for hip-hop because
they are a hip-hop DJ, and this other person is a drum n’ bass DJ so they
do drum n’ bass stuff. These people spend most of their days calling record
labels and soliciting to them.

We also get tons of submissions from independent artists to our site.
To submit to Epitonic all we need is to be able to hear your music. Someone
can send us an MP3 file, they can send us a link to an MP3 file, and they
can even send us a CD and so on. If you want to submit, you can go to
our website and find
out where to e-mail and who to send it to. However, we are picky.
Our site is 100% consumer focused in that we make the decisions about
what’s on our site with our consumers in mind. If it benefits our constituents
with regards to content acquisition then we do it. If 10,000 bands are
trying to put content on our site and the value of that music is mediocre
then that value of having those bands is significantly less than having
10 or 100 bands that are of superior value. We don’t tend to accept that
many unsigned artists. We only take the ones that absolutely floor us
and so when you go to our site you see that currently there are less than
1,000 bands on our site. Maybe only 25 or so of those are unsigned artists.
We definitely aren’t the outlet for the unsigned act.

J: When you do decide to work with a band do you require that they sign
an exclusive digital download deal?

A: Absolutely not. We encourage people to put their music anywhere they
can on the web to promote themselves. They do sign a contract with us
that grants us the permission to put the music on our site to protect
us legally. But that contract is very simple. It’s only about 3/4 of a
page long and it’s non-exclusive and it’s non-binding. Artists who work
with us can walk away at any time.

We are a consumer-focused site and we think that by serving the consumers
needs we’ll grow an audience. We think a byproduct of doing that well
is that the artists that we represent on our site will also receive value
by reaching those constituents. So if the artist isn’t happy with the
way we treat them, or with the results they get from being on our site,
we believe they shouldn’t have to stay.

J: Is this all free content, or do you sell digital downloads as well?

A: When we started our website a year ago we looked around and said,
“Who’s doing this? We’ll follow their lead.” So we went with the Emusic
model of selling tracks. We started trying to sell tracks for 75 cents
and 25 cents. The results were less than mediocre, they were pretty horrible,
even though we had good content our site and the content keeps getting
better and better. Still it was not like there were thousands of people
who were banging on our door to buy music. I think as you look at the
record of our competitors who also sell digital downloads you will see
that they also don’t sell that much.

When this happens there is no value for the consumer because they don’t
download the music and find out about new bands. There is also no value
to the artists because they are not getting exposure and there is no value
to us because our success depends on their success. So we quickly changed
our motto to “our music is for free”. Now we have to worry about monetizing
the crowd another way. We have to figure that out later.

J: Which is my next question: how do you expect to get paid if you are
just giving away music?

A: Let me back up a second and finish answering the question, ” Do we
sell anything?” because we do have some music up for sale on our site.
It’s entirely up to the artist and the label whether we put it up for
sale. So we have the capacity to sell tracks but we make the artist and
label very aware that they probably are not going to sell any because
the consumer behavior is not to buy downloadable music right now. So ultimately,
it’s up to the artist if they want to put their tracks up for sale.

Now, the answer to the next question of, “How are you guys going to make
any money?” To begin with, we plan to make money, but we don’t make any
now. It’s our belief that smart Internet companies are quick to learn
from Old World companies and they are quick to try to develop new strategies
for marketing and monetizing an audience. The way we are approaching it
now is to say, “Listen, we don’t have all the answers but we are going
to try everything we can think of.”

We have a huge demand to be able to purchase CDs from our site. We get
email on a daily basis from consumers who are saying. “I love this band
I found on your site, where can I buy it?” Unfortunately the independent
music market is a fragmented one. There isn’t one distributor that we
can then plug in to an e-commerce solution, so we’re working on how to
solve that problem and we’re waiting to see if someone else does it before
us and then we’ll just partner with them to sell it and split the revenue.

Also, we’ll eventually start doing targeted advertising. We don’t like
banners but we think it makes sense to say, for example, that the electronica
section of our site is sponsored by the Sony Memory Stick or whatever.

Also, we plan to sell downloadable music, if and when consumers begin
purchasing it as well as, perhaps enacting some sort of subscription model.

J: If you are not making any money, how are you supporting yourselves
as a company?

A: We’re still very much in a product development phase. We’re more interested
at the moment in building a solid site, good relationships with other
sites, and solid relationships with our label partners. It’s cliche, but
the phrase “increase shareholder value” is the right way to look at it
(in the same way that the SIMA group doesn’t recognize that positive value
is the right way to look at MP3.com — not cash). If we focused all our
efforts on revenue right now, without a sticky site with good content
we’d have to blow millions on marketing to get an audience that was disappointed
that spent little to no time or money on our site. In the long run, after
our site is a bit more robust and relationships with those that supply
us content are easier to manage (25% of our resources go to label relations),
then we shift our focus from building to monetizing.

If you’re looking for a more real-world answer than that — we don’t make
any money right now. In the beginning we “supported ourselves” off our
own money and our families. Terry and Walther and I didn’t get paid ANYTHING
for about 4 months and when we did, it wasn’t much. Then C|net
(our principal investor) put in enough money for us to grow and build
for a while before we have to start focusing on that.

J: Now, we’ve touched on subscription before in some other interviews
but many people don’t really understand what a subscription model is.

A: A subscription model would be like, “all the music at Epitonic is
yours to download for one low price a month.”

J: Like cable.

A: Yes, the notion of directly monetizing the downloadable music. You
can listen to the samples and you can read all day long but to download
the music you have to be a subscriber. So, yes, that’s still on our plate
of things to explore but we certainly haven’t taken that step yet. I would
say that that option is one of the less attractive ones because it’s failed
at so many other companies that have attempted to do it.

The last option, and this is probably the most promising, is content
syndication where there are other websites out there that have consumers
clicking on them all day long looking for downloadable music. So you go
to a search engine, you type in MP3, you find something and you leave.
Well, we are getting phone calls on almost a daily basis now where companies
are calling us now and saying, “Listen, we want to syndicate your content.
We want to have that Epitonic experience at our site.”

Well if that happens that’s good news for our artists because it means
they are getting more distribution, more exposure. It’s also good news
for us because not only are we distributing the content and getting more
access to more consumers, but we start monetizing the content. In one
of the three ways that I’ve outlined, it’s now going to be scaled across
the networks of other websites and their audiences. But it also means
that we have the opportunity to say to those companies, “Well, we’ll either
charge you a rate to syndicate your content or we’ll split the revenue
on the ad banners that you show on those sites, or something like that.

This has only happened very recently, where in the last few months we’ve
begun to receive all these phone calls. So we’re still at the beginning
stages of exploring that as a revenue possibility.

J: How soon do you think we are to moving to a digital download model,
or do you?

A: There are two things that will determine this and I don’t know how
to put a timeline on them because I can’t really see how fast they are coming:

First, I think the CD that we use today is going to go through some
physical changes. I think it’s going to evolve to a point where we still
have a physical product but we will be able to do more things with it.
A good example is the DVD compression technology. I mean, look at how
much you can fit on a CD-sized disc now. That means that if you only need
an hour of music and the capacity of the DVD is 15 hours then that means
that we now have the capacity to get 15 times smaller and still contain
the same amount of music. So imagine that you have a mini-disc player
that is the same quality but much smaller. Also, imagine that those formats
become recordable so the CD becomes less a product of music and more a
method of storage. So you can use the CD to do a lot more things depending
on how it changes in size and power.

The other answer to the question of when we move to a fully digital Internet
kind of music-oriented society is maybe never. I still personally enjoy
having the CD. I’ve found entire albums online in the digital download
format and then still gone out and bought them as CDs because I like to
support the artist, but mostly because I like to have the product and
it is pretty affordable.

Either way, before we can have this online music thing really, really
take off, it has to be usable by consumers. It has to be portable. You
have to be able to do everything you can do with CDs. That means not only
the ability to easily transport this music from a computer to a more portable
format, but also it means that the music is now streamable to you from anywhere.

So the way I think about the future — and again, I have no way to predict
when this will happen, or even if — but when it happens I want it to
be wireless. I want to be able to walk over to my refrigerator and pick
a playlist that my friend has made for me and listen to it. I want to
be able to stream it wherever I go. It’s sort of a “radio-free earth”
type of idea. I have no idea when it’s coming, but I went to the Consumer
Electronics Show (CES) this year, and let me tell you, around every corner
was another music walkman, downloadable music toy.

J: Yeah, it seems like one of the benefits of going to something like
a universally digital format is that you can then create so many different
types of devices that would all use the same content. It wouldn’t be like
it has been in the past where you need to pick between options of flexibility
or quality based on which format you ownÆ’i.e. cassette vs. vinyl vs. CD.

A: The only thing that scares me more than anything, especially after
going to the CES, which is such a clown show. I mean, it’s in Vegas and
it’s a huge convention center filled with these consumer electronic prototypes,
99 percent of which you could never imagine actually owning. So I just
have to ask myself, how much can we really buy? We’re this country that’s
made up of materialists, but how much can we really buy? I mean, I have
a cell phone and I have a Palm Pilot and I have nice headphones and I
have a decent stereo and I have a thousand CDs and 800 albums and I have
a computer at home and a computer at the office. I mean, I know I have
a lot, but when you go to something at CES and you start thinking about
the digital future, you start going, “wow, how many things can this country
really buyÆ’?” But anyway, that’s a side-note.

J: Well it’s an interesting one, because it does really feel like we
are in a particularly overwhelming period of consumption.

A: When the barrier to market gets lowered on any sort of commodity you
have this drowning sensation as a consumer. I mean, that’s the feeling
I get when I go to some place like Listen.com or I go to someplace like
MP3.com. It’s like walking into some huge Costco of records. You can’t
consume it, there’s too much. There’s too much noise and because the barrier
to entry has been lowered. And this is something that got shot down so
hard in that SIMA letter that I wrote.

J: Explain what that letter was

A: I put a lot of thought into it. I’d rather just read you the letter.
I can send it to you again.

J: Well we can connect this interview to that letter, but for now can
you just explain what it was?

A: This really comes back to the Epitonic aesthetic of, “hey, we’re going
to be the editorial filter for you.” When the barrier to market for music
entry is essentially shattered, which is what MP3 has done (and theirs
is a beautiful message, which says, “send me your noise and we will publish
it.”) But that beautiful message gets tainted a bit when you start thinking
about what that means for the artists. Now instead of some really good
band in Chicago competing with the 400 other good bands in Chicago, they
have a market that is now essentially international which is good. But
they also have competitors who are now international and those competitors
are not necessarily great bands. It’s easy for them to get lost.

When you go to MP3.com there is something like 40,000 artists and even
if I wanted to there is no way that I could sample each and every one
of them. If I did sample every one of them I might go crazy because the
quality of so many of these bands is so mediocre, because the barrier
to entry is so low. So when you lower the barrier to entry for the music
market the end result is that not only does the consumer get lost in the
wash of noise but it also means that the “quality artists” are also getting
drowned out by all of the rest of the noise. So when you have me in my
kitchen recording myself and demanding the same types of royalties as
The Jesus Lizard gets, well that’s just not appropriate.

J: Well, do you really mean that? Because if someone is buying a track,
any track, don’t you think that artist deserves equal royalty and compensation?

A: Well that’s just it. If we look at the MP3.com model for example: if
someone sells a CD on MP3.com they get a way larger percentage of the
profit than they ever did selling their records through a record label.
The SIMA argument says, “artists should get money each time someone downloads
a track.” My biggest problem with this argument is that, first of all,
just because I download a song doesn’t mean that I like it. I mean I may
download it, listen to it and throw it away. Secondly, when you have a
music market out there that exists that nets $16 billion domestic US and
you now have to divide that among 14 billion bands instead of 14 thousand,
that means that the bands that are really good have the capacity to suffer.
It could spell one form of bad news for the existing quality artist out there.

The good news is that there is a greater possibility for exposure. But
the key thing there is making that exposure happen. That’s where Epitonic
steps in and says, “Listen, we don’t think that this model of ‘there’s
40,000 artists, let’s let the consumer find the good ones,’ is a good
idea.” Not because we think we should take that right away from the consumer,
but because you can’t consume that much. So we say, “Listen, we’re going
to undertake the task of whittling that down. Come to our site and check
out 10 artists and you won’t find any garage bands and you won’t find
a lot of crap, you may find something you don’t like,” but that’s a different
thing entirely.

J: Okay, let me ask you a question about publishing. As an artist it worries
me that it doesn’t seem like BMI,ASCAP or the major labels are making
sure that artists are going to get paid for digital downloads. What do
you think about the issue of paying performance royalties?

A: Well it depends on what labels you are talking about. I don’t see the
huge labels saying to themselves, “How are we going to make sure our artists
get paid?” They are thinking, “How do we make sure we get paid?” I think
one of the big messages there is, “Hey listen, now this has become an
international market and one of the big problems is that the older methods
of making and marketing music in that monolithic mega-marketing chain
approach are very likely to go away. Those chains may continue to be around
but they will be significantly less important. The Internet in general
hates a middleman so you see chains like Barnes & Noble falling to the
wayside to Amazon because Amazon is able to reduce the number of people
between the producer of the content and the consumer of the content.

This is also happening to the major labels that are facing a similar problem
in that now any band can easily publish their own stuff. I think that
their fight to make sure that they continue to get paid is going to be
a very difficult one. Another thing to remember here is we can talk all
we want about regulating this industry, but that’s just like Congress
trying to regulate the Internet. This technology does not just belong
to America, nor does it just serve America. So we can make all the rules
we want about copyright, the question is how are we going to be able to
implement them worldwide.

So stepping back to your original question, “how are artists going to
make sure they make money for this thing they work hard for?” I think
the answer to that question still lies, first and foremost in making a
good band. First they have to be a good band and make good music.

J: I understand what you are saying and that is a good point to emphasize,
but it doesn’t really address my question of how artists are going to
make sure they get paid for their work. About five years ago I watched
an eye-opening documentary on Channel 4 in England about the music industry.
It was part of a series and one episode focused on songwriters and publishing
and it followed about 6 different story lines over the course of the two
hours. One of them concerned the song “Why Do Fools Fall in Love” which
is one of the all time highest performing songs in the history of publishing.
Well, basically the point of that whole story line was that the kid who
wrote the song was cheated out of his publishing, so for the first 35
or so years the royalties for that song did not go to him. It’s an extreme
example but an easy to follow one, it underlines the fact that talented
artists get taken to the cleaners all the time. Talent doesn’t protect
you from unfair business practice.

A: Well, I wasn’t saying that being in a good band is the answer but I
just wanted to emphasize that one of the most important things is to make
a good product. The reason why I’m emphasizing that is because increasingly
the major labels are going to be less important which means the amount
of money that you have to promote your music is going to be less important.
The quality of the music is going to be much more important. You know
like, Ricky Martin — that music sucks but it has the money behind it
to make it go platinum. As companies like ours proliferate and people
begin to look around they are going to discover that there is better music
out there. So that’s what I was saying, but as far as monetizing that…

I feel with regards to the online world vs. the off line world — neither
one will ever win. Those two markets will need to work together until
a true wireless world exists when every average consumer has the ability
to use that type of technology. Until then it’s still a physical world.
You still have to put out a CD and promote it well. I don’t see the online
world monetizing downloadable music in a way that says buy this track
for 75 cents anywhere in the near future, and maybe never. I think that
the online world needs to figure out how they can put together a group
of music lovers and get them to learn about music and then sell them the
physical product.

J: Digital Rights Management exists in concept now. It’s only a matter
of time before it is applied. There are several theories on how this will
come down. One suggests that once Digital Rights Management is implemented,
companies like yours would not be allowed to offer downloads, even for
free, without paying an artist some sort of royalty.

A: Well the only thing I can say to that is this: First off, our company
doesn’t ever want to be screwing any artist. We want to make sure that
the value that they take away from putting their music up on our website
is positive. One of the other things that I commented on in the SIMA article
was that all these unsigned bands that want some sort of royalty every
time they get a download and my message is, “No, that’s not the right
way to think about it.” The right way to think about it is this, “I am
in a relationship with this online music company and I get positive value
out of it and as long as that is the case, I should keep doing it.”

J: So you are saying that even if there is a future in digital rights
management where a company would guard those royalties for artists, artists
should still sign an agreement allowing you to download their music for
free because of the value of that service?

A: The point is that the agreement that they sign allows them to walk
away at any moment, which means if we do not provide them with a positive
value they will walk away. So with our company, if we ever directly monetize
the downloadable music then of course we’re going to share that with the
artist in whatever way we can.

Right now that includes that fact that we already split the profit of
any purchased downloadable content with whoever owns the rights to that
content. In the long run though I think that the answer is that if someone
comes in to administer digital download management and they come to us
and say, “take this band down or pay us a royalty,” we’ll probably shrug
our shoulders and take the band down. We’ll have to because now we don’t
have a way to monetize that content. The second we do, of course we’re
going to be willing to share that with them.

J: So what’s the best thing about the Internet?

A: The ability to reach an audience. I was in punk bands in high school
in Greenville, SC and I was in one that was completely unique. I have
never heard another band like it and it was like Math Rock hi-fi and I
just wish that more people had heard about it. So the big opportunity
of the Internet is that now you have a way to spread your message more
effectively. But I don’t think it necessarily changes anything other than
you can reach a wider audience. It’s still no substitute to being a great
band and working with a really great label. If Touch & Go comes to you
and asks to put out your album and you say, “No, I’m going to put it up
on MP3.com,” well, that’s a bad move.

The Internet does mean that, as far as promoting your band, you have a
sincere advantage over any band 10 years ago.

I also believe the open attitude of the Internet is one of the best things
about it. I mean, look at Linux, look at MP3 and HTML and all the open-source
technology. It implies that we as a society, and the earth in general,
are creating something together. We are creating one thing that says ideas
proliferate, that people are no longer bound by geography, and that cultures
have the ability to share the things about them that thrive. That’s the
greatest thing about the Internet to me.

J: What’s the worst thing about the Internet?

A: The worst thing about the Internet is that it’s a new undiscovered
country for commercialism. I think back to 1994 when the internet was
basically just a bunch of NASA homepages and a few people who had like
a picture of their cat and a bunch of really bad Captain Kirk vs. Captain
Picard jokes. It used to be that the “web” part of the world wide web
meant something. You went to one site and checked stuff out and there
were links there to other sites so there really was this web with direct
connections. Now what I think the Internet means to most people is shopping
or something like that and that discourages me because I think, “wow,
this has the potential to be so much more.” Not that I’m anti-consumer/anti-commercial,
but I think in general you just have the capacity for the old business
mentality of “I want to own this market” proliferating instead of, “wow
I’ve got these great ideas and I want to disseminate them.”